A good credit score is generally 670 to 740 on a scale of 300-850 per the FICO score and VantageScore.
A borrower can consider a credit score as good if it provides confidence in his creditworthiness to the lenders which further affects lower interest rates and flexible loan terms.
In short, A credit score starting from 670 to 740 is considered as good and very good. A score of above 800 is excellent and any score below 669 would make anyone’s loan availability difficult.
Here’s a table that outlines the score range, interpretation, and usage:
| Credit Score Range | Interpretation | Usage |
|---|---|---|
| Excellent (800-850) | Exceptional credit history, very low risk to lenders | Best interest rates, premium credit cards, highest loan amounts |
| Very Good (740-799) | Strong credit history, low risk to lenders | Lower interest rates, high credit limits, favorable loan terms |
| Good (670-739) | Positive credit history, moderate risk to lenders | Competitive interest rates, standard credit card approvals, reasonable loan terms |
| Fair (580-669) | Some credit issues, moderate to high risk to lenders | Higher interest rates, limited credit card options, stricter loan terms |
| Poor (300-579) | Significant credit problems, very high risk to lenders | Very high interest rates, secured or subprime credit cards, very restrictive loan terms |
Key Takeaways
- Credit score determines the borrower’s creditworthiness.
- The scoring system varies by country and scoring system (e.g., 300-850 in the US, 0-999 in the UK).
- Payment history is the most critical factor.
- A longer credit history is better.
- To increase rating, ensure timely payment, avoid unnecessary bills, and consolidate existing loans.
How does credit score work?
A credit score represents your creditworthiness, which is used by lenders to determine borrowing amount, interest rate, and borrowing terms.
In simple terms, whatever the transactions we make every day get recorded and processed by the credit bureau.
This mechanism of scoring someone’s creditworthiness was first developed by Fair Isaac Corp (FICO) and further modified by VantageScore.
Both the FICO and VantageScore use the 300-850 model to score creditworthiness but with slight changes in methodology. (We will discuss it later)
When someone applies for any borrowing from any bank, credit union, or online lenders, the credit rating report is the first thing borrowers look at and start deciding on debt eligibility.
If the credit rating is excellent, the borrower easily accepts the loan application and disburses the funds.
However, lenders may have their judgment apart from the credit score that can affect the availability of borrowings.
How does a good credit score help you?
A good credit score unlocks your first access to any personal loan. The better your score is, the more flexible and cheaper your debt will be.
For credit cards, you will get the lowest APR and premium rewards with scores above 800. It happens only because a healthy score significantly decreases the lender’s risk exposure.
But, why a good score lowers the APR?
Banks are required to maintain liquidity per the Basel (a set of international regulations on capital reserve).
If any bank allows credit to a low-scoring person, it needs to maintain adequate liquid reserve so that the organization’s liquidity is not at risk in case of default. Similarly, banks need to maintain a balanced portfolio between low and high-scoring borrowers.
So, if you are a borrower with an 800+ score, you are actually saving the bank’s cost of maintaining additional reserves as per the Basel.
Here is a table that illustrates detailed usage of credit score range:
| Credit Score Range | Credit Cards | Mortgages | Personal Loans | Car Loans |
|---|---|---|---|---|
| Excellent (800-850) | Eligibility for premium rewards cards with the best perks and low APR | Access to the lowest mortgage rates and favorable loan conditions | Highest loan amounts with the lowest interest rates | Best financing terms, including the lowest APRs |
| Very Good (740-799) | Approval for cards with good rewards and benefits | Access to low mortgage rates, though slightly higher than the top tier | Low interest rates, though marginally higher than for excellent scores | Competitive loan rates, similar to those with excellent credit |
| Good (670-739) | Approval for standard rewards cards, possibly with higher APRs | Reasonable mortgage rates, though not the lowest | Moderate interest rates, reflecting some risk to lenders | Average loan rates, higher than those for very good or excellent credit |
| Fair (580-669) | Approval for basic or secured credit cards with higher fees and rates | Higher mortgage rates, requiring a larger down payment | Higher interest rates, limited loan amounts | Higher APRs and more stringent loan conditions |
| Poor (300-579) | Secured credit cards or subprime cards with high fees and APRs | Very high mortgage rates, possibly requiring a co-signer or larger down payment | Very high interest rates, limited amounts, and possibly requiring collateral | Highest loan rates, often requiring a larger down payment or a co-signer |
What does a lender look at your credit report?
While reviewing a borrower’s credit rating report, a lender typically looks at overall credit score, payment history, credit utilization behavior, length of credit history, credit mix, and recent credit activity.
Overall, the lender tries to figure out the creditworthiness of the borrower that has a further impact on allowing a loan and its variables such as interest rate, tenure, and other conditions.
Your lender will also look for the previous history of bankruptcies, liens, and legal judgment.
Credit mix always plays a vital role. The credit mix suggests to the lender what type of loan a borrower already has and how the borrower is responding to his previous lenders.
Why does the score fall suddenly for no reason?
Credit scores, crucial for loan approvals and job opportunities, can drop unexpectedly, causing confusion and frustration. This sudden decline often stems from several factors, including errors in your credit report, changes in credit utilization, closing accounts, making late payments, generating hard inquiries, and not maintaining a diverse credit portfolio.
Understanding these reasons can help you take proactive measures to maintain a healthy credit score.
Errors in your credit report, such as incorrect personal information or outdated account statuses, can significantly impact your score. High credit utilization, closing old accounts, missing payments, and frequent hard inquiries also contribute to sudden drops. Additionally, a well-balanced credit mix, including a variety of credit types like mortgages, auto loans, and credit cards, plays a vital role in maintaining a robust credit score. Regularly monitoring your credit report and addressing issues promptly can prevent unexpected declines and keep your credit health in check.
How to improve your credit score?
Improving credit score requires timely bill payments, keeping credit utilization low to 30%, and diversifying debt port portfolio.
If you want to get a loan with a low APR, you need to ensure an acceptable credit score. Here are some proven tips that actually work on boosting credit rating:
- Pay all your bills on time since the billing history affects 35% of your credit score. Learn how late payments affect your score.
- Make some extra payments into your credit cards that will ensure a better Loan Utilization Ratio and reduce your debt exposure.
- Do not open too many bank accounts. If you have any unused accounts, close it down. Bank transactions and idle accounts negatively affect credit rating.
- Get your own credit rating report and perform a reconciliation. There might be any errors or misinterpretations.
- Diversify your credit mix. You can refinance or consolidate your existing debts to ensure a lower APR and smaller monthly payments.
- Ask a trusted family member or friend with good credit to add you as an authorized user on their credit card.
- Try to open a secured credit card by pledging a deposit account. It will decrease the proportion of your unsecured loan and significantly reduce your Debt-to-Income ratio (DTI).
- If you are using any revolving line of credit, try not to use the limit excessively. If any revolving account has a balance, try to settle them off.
- Avoid being someone’s loan guarantor. In case of default, both borrower’s and guarantor’s credit score is harmed significantly.
- Understand how credit rating works and put your effort into enhancing your performance.
Learn more on how credit card payment improves your credit score.
How to build credit with low income?
Building a decent credit score with low income can be challenging but this is not impossible. Here is a list of few effective strategies:
- Get a secured credit card. For example, get a $200 credit card with a $200 deposit and make your small bills. It will restrict from incurring unnecessary expenses and build a good credit history.
- Local credit unions often provide a credit builder loan. The loan amount is held in a savings account while you make monthly payments. Once repaid, you get the money and a positive credit history.
- Make timely payment of your bills with a solid personal plan.
- Try to keep your credit utilization lower. (a 30% credit utilization ratio is considered to be amazing).
- Try RentTrack or RentReporters (or similar) to report your rent payments to the credit bureaus, helping to build your credit history.
- Take a small loan either from family or Peer-to-Peer lenders and deposit into your accounts. Use the account to get a secured credit card and make your bills with that credit card.
- Retail store cards are often easier to get approved for and can help build credit if used responsibly.
How do reporting agencies calculate your credit score?
Credit rating agencies use various scoring factors such as payment history, owed amount, length of credit, credit mix, previous late payment, credit utilization, recent credit, available credit, and income frequency etc.
The reporting agencies update your information periodically at a different time. This is impossible to know the exact score update date by the way.
Here’s an example of how FICO and VantageScore score borrower’s creditworthiness on the scale of 300 to 850.
| Factor | FICO Weightage | VantageScore Weightage |
|---|---|---|
| Payment History | 35% | 40% |
| Amounts Owed | 30% | 20% (Credit Utilization) + 11% (Balances) |
| Length of Credit | 15% | Part of 21% (Depth of Credit) |
| Credit Mix | 10% | Part of 21% (Depth of Credit) |
| New Credit | 10% | 5% (Recent Credit) + 3% (Available Credit) |
Here’s how FICO calculates your Score
FICO puts 35% weight on the total score on payment history. It notices the timeliness of bill payments, the severity of late payments, and the frequency of late payments.
A 30% score is assigned for amounts owed. Credit utilization ratio (balances to credit limits), total balances, and the number of accounts with balances are noticed in this stage.
Length of the credit history receives 15% weightage which focuses on the age of the oldest account, the average age of accounts, and the age of specific account types.
Credit mix receives a 10% score distribution that looks for the number of recently opened accounts and recent hard inquiries.
How VantageScore calculate credit rating?
VantageScore puts 40% scores on payment history. It notices on-time payments, missed payments, and adverse public records to assess payment timeliness.
Depth of credit gets a 21% score distribution to identify the age of oldest and newest accounts, average account age, and types of accounts.
Furthermore, credit utilization gets 20% of the total score. The agency looks if you are crossing the utilizing limit or maintaining a buffer.
11% marks is distributed on the current and recent balances to identify the amount owed in all accounts. 5% marks are kept for new credit inquiries and recently opened accounts to notice the number of recent inquiries and newly opened accounts.
Lastly, the total available credit gets a 3% score to indicate if the amount of credit is available in all accounts.
What are the core differences between FICO and VantageScore’s credit rating?
- FICO requires at least 6 months of credit history whereas VantageScore’s minimum credit history requirement is 1 month.
- The scoring system is different. FICO has less score for payment history whereas VantageScore separately distributes individual scoring for the credit mix. For example, FICO assigns 10% for the credit mix and 10% for the new credit whereas the VantageScore totals 19% of the score separately for balances, recent credit, and available credit.
- FICO places high importance on credit utilization ratio and the VantageScore looks for overall available credit.
- VantageScore is uniform, it does not have any version but FICO has different versions (e.g., FICO 8, FICO 9, and later).
What percentage of people achieve maximum credit score?
The highest credit score is 850 and the top scoring range is 800-850. Per the FICO data, approximately 20% of Americans are in the maximum scoring range.
For Canada, the maximum credit score is 900. As of the Equifax and TransUnion data, at least 15% of Canadians are in the top-scoring range.
In the United Kingdom, the maximum credit score is 999 and based on Experian UK’s data, approximately 13% of the British stay at the top tier of credit score.
In Australia, the highest credit score is 1,200, and at least 20% of Australians score in the top range as per Equifax Australia’s data.
How to freeze credit?
Credit freezing represents restricting access to your credit report. Credit freezing does not affect the credit score. It helps to hide the borrower’s identity so that no one can open or scam an account with the same name and date of birth.
Here’s how you can freeze your credit report:
- Contact Credit Bureaus: Request a freeze from each of the three major credit bureaus (Experian, Equifax, TransUnion).
- Provide Information: Supply personal information such as name, address, Social Security number, and date of birth.
- Set a PIN/Password: Receive and set a unique PIN or password to manage the freeze.
- Confirm: Each bureau will confirm the freeze, and it takes effect typically within one business day.
What is the perfect credit utilization ratio?
According to Experian, a perfect credit utilization ratio is typically 30% or lower. It represents that a borrower did not need to utilize the credit while he was permitted to avail the debt.
For example, if you have a total credit limit of $10,000, aim to keep your outstanding balance below $3,000. Ideally, keeping the utilization ratio below 10% can have an even more positive impact on your credit score.
Does checking credit hurt your credit score?
No, if you check your credit it will not hurt your credit score. Any soft inquiries such as using services like Credit Karma to check your score will not have any impact on the credit report.
However, “hard inquiries,” which happen when you apply for new credit can slightly lower your score
How to use an annual credit report?
With an annual credit report, you can review your personal information, credit history, credit utilization, and debt performance, identify inquiries and errors, fix disputes, and monitor your financial performance regularly.
If someone willingly generates his/her credit report with a soft query, it will help a lot to oversee credit performance, fix any errors, and plan for future payments. Overall, a yearly review gives a suggestion to increase the credit score and save time in future loan applications even if there are any errors or discrepancies.
What is the average ideal credit score by age?
Here’s a table that illustrates the average ideal credit score for the different age groups. We analyzed credit report agencies’ data and other various financial studies.
| Age Group | Average Ideal Credit Score |
|---|---|
| 18-24 years | 630-650 |
| 25-34 years | 650-670 |
| 35-44 years | 670-690 |
| 45-54 years | 690-710 |
| 55-64 years | 710-730 |
| 65+ years | 730-750 |
Bottom Line
The credit score is a vital indication of your financial health. Lenders’ decisions will always be based on the credit rating. So, it is important for you to understand how the scoring system works and what would you do to increase your credit performance quickly. While the factors affecting credit scores generally include payment history, credit utilization, and length of credit history, the exact scoring models and ranges can vary significantly.
Understanding and managing your credit score is essential for accessing financial opportunities and achieving favorable terms in credit-related transactions. Regular monitoring and responsible financial behavior can lead to better credit scores and improved financial stability.
